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In the Mood for Love? - Testing the Life-Cycle Theory of Inter-Organizational Relations

First comes courtship, then marriage. In a nutshell, this outlines the life-cycle theory of relationships between customers and firms. From first contact, a relationship of trust builds through several stages until it reaches maturity. Though this theory is widely held, the relationship between life-cycle and firm performance has not been empirically tested. Using survey data of the channel resellers of a large chemical manufacturer, Professors Sandy Jap and Erin Anderson, the authors of this working paper, find general support for the life-cycle theory, though their findings suggest that the stages of build-up are not as clearly defined as has been thought.

In 1987, an influential article by Dwyer, Schurr and Oh introduced the notion that stable buyer-seller relationships develop according to a predictable series of events occurring in a fixed order. Beginning with a period of awareness, they accelerate through periods of exploration, expansion (build-up) and finally culminate in commitment (maturity). From this peak, some then enter into decline, possibly leading to dissolution.

The influence of this theory is widespread and has produced many normative suggestions for managing customer relationships. Given its stature, it is perhaps surprising that so little empirical validation of the theory exists, and that none have considered the relationship between firm performance on the ascending and descending slopes of the life-cycle. Sandy Jap, Associate Professor of Marketing at Emory University and Erin Anderson, the John H. Loudon Chaired Professor of International Management at INSEAD seek to pick up where others have left off in this Working Paper.

In order to test the descriptive validity of the life-cycle theory itself, the authors develop a series of propositions based on relationship properties. These indicators of relationship health exist in many forms, including such factors as: goal congruence between buyer and seller, harmony, openness of communication, dependence, willingness to take risks for each other, trust, and strong preference for the seller.

As relationships are not static and they can move either forward or backward, two groups ostensibly occupying the same developmental phase may, in fact, be moving in opposite directions. For example, a relationship in expansion could have either progressed from a phase of exploration or it could have regressed by falling back from the committed stage. The prior history of the relationship plays a vital role in determining its overall health, as the history of a relationship substantially influences how social actors perceive relationship dynamics, frame its performance and set the time horizon for its resolution.

The authors also posit the importance of the individual sales representative in the buyer-seller relationship. The trustworthiness and attitude of individual salespeople can be critical in determining a reseller’s view of supplier reliability and can affect the customer’s interest in continuing the relationship.

The authors tested their propositions on 1300 channel resellers of one of the top five world producers of chemicals. In a questionnaire, they asked participants to rate their relationship with the supplier using the relationship properties listed above.

Though the authors found general support for the life-cycle theory of relationships, they discovered several modifications. First, the results consistently indicated that mature relationships were not usually the pinnacle of relationship development. Second, there was little empirical difference in the relationship properties between the build-up and maturity phases. This coincides with other studies that have asserted that much trust-building in commercial relationships takes the form of re-building from a prior set of transactions. Thus, it makes sense to simplify relationship build-up to three stages: building, stability and dissolution. Lastly and intuitively, deterioration shows the lowest degree of relationship satisfaction but that this stage can be extremely drawn out. Furthermore, the scars inflicted by damaged relationships do not heal quickly, suggesting that firms are not able to easily renew relationships.

The implications for managers of this study are several. It affirms that relationships are dynamic and that their composition and nature change over time. Recognizing this, managers can better develop strategies best suited to each relationship's stage of development. It is important for firms to pay attention to how a relationship develops and to avoid, if possible, their entering a decline phase.